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Viral V. Acharya, C.V. Starr Professor of Economics at New York University’s Stern School of Business and a former deputy governor of the Reserve Bank of India, speaks with Global Finance about the fallout of the coronavirus epidemic.

Modi Empowered By State Wins

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The decisive electoral victory in March by the Bharatiya Janata Party (BJP) in Uttar Pradesh and the Himalayan state of Uttarakhand was a dramatic event in Indian politics—nearly as stunning as Donald Trump’s surprise win in the US presidential election—and a confirmation that prime minister Narendra Modi’s huge popularity with voters remains undiminished even after the sudden elimination of some banknotes last fall. The size of the win will embolden Modi to push through economic reforms ahead of general elections in 2019, although some policies may prove unpopular with voters.

“The scale of the BJP’s authority makes more-ambitious reforms increasingly likely in a second BJP term, such as the abandoned land-acquisition act,” Keerti Rajan, head of political risk and forecasting at IHS Markit, tells Global Finance.

The economy grew 7.1% in the fourth quarter of 2016, according to the Central Statistics Office (CSO), despite the controversy around “demonetization.” In November, Modi announced existing notes of 500 and 1,000 rupees ($7.64 and $15.27) notes were banned, to be replaced with new 500 and 2,000 rupee notes. The prohibition, said to be aimed at reducing corruption, caused chaos at banks and businesses that was expected to hurt productivity.

“The drag on growth has been smaller than expected,” Rajan comments, “although its effects are unlikely to have been fully transmitted and may be reflected in subsequent GDP revisions.” Many observers—at financial institutions such as Citigroup, DBS, the IMF and the World Bank—have expressed skepticism about the CSO number. Sonal Varma, chief India economist at Nomura, comments that it “appears to be at odds with reality.”

Modi could soon turn his attention to a banking sector weighed down by nonperforming loans. “Lending is a necessary precondition for investment to pick up,” notes Jan Zalewski, principal India analyst at Verisk Maplecroft. “But the nonperforming loans issue is preventing banks from doing so.”

Elsewhere, Modi’s much-delayed vision of a nationwide unified goods and services tax may be realized this year. With this considerable electoral win under his belt, Modi looks set to remain in charge of Asia’s third largest economy for a considerable time to come.